What Is Your Best Sourcing Solution?

Before we start, let’s lay three ground rules:

1.     Every situation is different; there is no cookie cutter solution.

2.     Any solution needs time to show it is working, even if it looks good at first; that being said, clearly, not working can show up quickly. Know the signs and don’t throw good money after bad.

3.     You are not excused from managing. Your attention will help to make sure the solution works the way you want it to, lack of attention will almost certainly make sure it doesn’t.

The Golden Rule: Throughout the process, you need boots on the ground. Just sending a QC to check production at the end is too late. Everything that went before leads to that moment.

There is no doubt that having a staff in country who will handle everything from product development to shipment is the ideal way to manage. However, many companies cannot afford to have permanent staff in one or many countries where they source product. So what are the alternatives and their pros and cons?

1.     A Trading Company- This company will sell and ship the product to you, including their profit in the price. They typically have staff enough to manage your orders (along with others). Pro: professional (we assume and hope) staff is included in your price. Con: Trading companies can take 25% or more for their efforts. Con 2: Trading companies are notorious for cheating customers to make more money for themselves.

2.     An Agent- Agent will manage your production for a commission. In this case, the factory price should be transparent to you. If the price including commission is acceptable, then it may be a good alternative. Pro: Agents are typically specialists in one or more sectors within a country. They will have staff that knows the product and the factories. The best agent should be seeing with your eyes (after you thoroughly train them, of course). Pro: Professional staff for a known cost. Con: Many agents “double dip,” meaning they will also take commission from the factory, which not only raises your cost but, most important, divides their loyalty so they cannot serve you as their only master.

3.     A Sourcing Company- There are many of these which offer a “complete solution.” Just sit back and relax (?) while your order is processed and delivered. Pro: None, unless you are lazy. Con: You lose transparency and control of your product. Con 2: As with trading companies, you never know how much profit they are taking. Considering the size of some of their offices, it may be a lot.

4.     A Surrogate Sourcing Office/Consultant- This type of company will help you with the entire process for a retainer/fee. Pro: Costs are known and product cost is net. Pro: There is no question of commitment- most similar to having your own staff. Con: If you source in more than one country, you cannot afford to pay this type of consultant in multiple countries or fly them around the globe. This solution is also difficult to manage in disparate time zones. Con 2: Some consulting companies are not category experts, just consultants-not good enough.

Whichever solution is right for you, there are some more rules that are necessary for success:

1.     You must train whomever you choose. They need to learn your systems and procedures, rather than you learn theirs. This means everything from hand feel to quality. If they are good, they will embrace this and work hard at getting it: if they resist, get rid of them.

2.     Make sure you thoroughly know both the surrogate and their factories. Don’t trust anyone-only what you see is real. Maybe this means that, in the beginning, one of your HQ merchants needs to go to the location and live with them for a time, at least a month.

3.     Make sure your HQ merchandising staff is qualified and experienced enough to manage remote sites. In the best case, they have done the job of the surrogate before, in the country. If not, experience in working these situations is critical. Most important: pay what you need to pay to get someone who will follow up and manage all details with no gaps and no mistakes.

4.     Build relationships with the factories, not just the surrogate. When you source directly, the factory has a clear picture of you as the customer and of your requirements. Using a surrogate, this should be no different. Most important, in the worst case where the surrogate is not working out, you can avoid difficult or catastrophic situations with your goods.

5.     Test first. No matter how excited you are or how severe the sales pressure, you must first give them a test order and wait the entire cycle before increasing. Besides mitigating your risk, it is not fair to the factory or the surrogate to put big pressure on them before you learn, train, and get things running smoothly. If you give big orders up front due to sales pressure or get seduced by the price, you are setting yourself and them up to fail.

6.     Don’t overassort your efforts. Many growing companies give in to pressure from management, buyers, investors, etc. to matriculate their success in one category into more before they have fully conquered the first one. This will require more staff or distract your existing staff focus, which is most badly needed if you are still in building mode. Land one plane at a time.

7.     People. People design things, people make things, people sell things, people buy things. Most important, people follow up and manage the entire process. Have an animate view of all people involved and how they are managing.

8.     Process. It is not just the quality and productivity of your staff work that is needed for success, but the systems and the process that they use to get it done. If your process is flawed, your staff work will be, no matter how good they are. Keyword: Simplify.

Whatever you do will take time and attention on management’s part to choose and then set up for success. All above solutions need a lot of hand holding until they are running smoothly (quality product delivered on time with no fires to put out).

BTW, maybe restating the obvious, but the above is just the beginning of the story. The rest of the story depends on right choices, right execution, and right people.

Social Compliance- A Needed Reevaluation

Don’t get me wrong. I agree that the customer of a factory, foreign or domestic, has the right to evaluate their suppliers.  What I believe needs reevaluation is the attitude and focus of these efforts with the original goal held dear- protect the workers.

The practice of social compliance today is a very sophisticated form of ass covering-especially for major retailers who don’t want to take any chances of being associated with a factory which engages in “questionable” labor practices or who suffers some catastrophic event, such as a fire. There is little thought given to the workers themselves and what is good for them (such as getting orders).

Same thing, you say. Making the factory adhere to certain labour and safety standards does protect the workers. The problem is, if the standards are too over the top by being too many or too complicated or unattainable, a factory may fail an audit even if they have basic and common sense standards in place. Let’s take fire, for example. After a catastrophic fire at a factory in Bangladesh (which never should have been used in the first place—another problem to be discussed later), Walmart went over the top with fire protection. One factory I was working with which was two floors high with a small staircase to the street level was forced to install smoke alarms on a 30 foot ceiling (huh? By the time the smoke gets up there, everybody already knows what is happening), and a fire alarm bell in each room—like some hero is going to stand there and ring the bell instead of yelling fire and getting the hell out himself. Fire marshalls , fire drills, more and more. This all could be simply solved by making the factory supervisor in that workshop responsible for safety in case of a fire. Fire extinguishers, exit signs- these are the basics. And, most of all, basic, common sense fire safety like not putting oily rags near a heater. I assume the Bangladesh factory passed a social compliance audit before it was allowed to produce orders, so something else was missing.

Compliance standards get more complicated every year. Which makes audits more difficult to pass and punishes the workers you are trying to protect. Very few factories I know can pass an audit cleanly because there are too many issues and many are not relevant to real life (my favorite is the Environmental Impact Report-huh? This is an example of the arrogance and lack of reality-based standards). They need to be simplified to the few things that really count, and which can be carried through to daily life in the factory-current ridiculously overcomplicated and unrealistic standards result in the factory dressing up for the audit day and not taking any of it seriously. Next day, back to business as usual. But there is much to be taken to heart. The goal of compliance audits should be to get the factory to understand and embrace a few key and simple cost-effective common-sense principles in each area- so they understand how it benefits them and make it part of their daily practice. Today’s reality is far from that goal.

Another main problem with compliance is the arrogance with which it is approached. Those who create and approve the audit criteria insist that every factory should be able to meet these standards every day-that without consideration of the realities of your average low-cost third world factory today. Those of us who have lived with these factories for years can clearly see the futility of many of these standards and the overall process. I strongly suspect that those writing and approving the standards don’t know or don’t care.

And, when the factory makes the news, such as the shoe factory in Dongguan who made the news recently due to suspected labour abuse and the arrests of some activists who tried to surreptiously document these abuses—made more juicy and newsworthy because it is Ivanka Trump’s shoe factory (no it isn’t- her shoe line is licensed and she not only never heard of the factory but surely has no role in which factories are chosen by the licensee) it becomes “China” not “this factory in China.” So the whole country is implicitly accused of labour abuses and uninformed readers will believe that is the case. With all due respect, when the US largest employer (Walmart) is also accused of labour abuses, should the Chinese people carry this as the impression of American management and not shop in Walmart China, or should the supplier refuse to sell to them?

In all of this, one key point is lost. The average worker, whether they are in China or another country, the same ones who the compliance regimen is supposedly geared at protecting, those who need to make money every day to feed their families, are the ones to suffer when compliance standards cannot be met and their factory cannot get orders. They also suffer because the good lessons of social compliance are lost in the overcomplicated mess of the practice today.

What should be done?

1.     As I said before, simplify. Reduce the audit criteria to the few basic, common-sense principles that will ensure safety and fairness to workers, and which factories can learn and practice.

2.     As a customer, don’t choose factories whose situation and management attitude guarantees they never will be a safe and happy place to work-even if their price is seductively low. You know who they are.

3.     This is far fetched and may never happen, but I think that countries themselves should set basic audit principles and provide approval grades and ratings (like the health department) which can be viewed publicly, so that potential customers can see them before they consider placing orders. Most important, if the nation is taking responsibility for social compliance (and not letting it fall prey to corruption-that is the tough part), the retailer or manufacturer’s ass is covered.

The best part of the above scheme is that the millions of factories making goods for domestic consumption should also be subject to these rules. That, dear readers, will be a victory for social compliance that we will never see under the current regimen.

How to Make Big Problems Out of Little Ones

This is a time in the evolution of the apparel industry where profits and market share are in flux. It seems everything is changing, not for the best for some companies. The players who are doing well are reading from a new script-speed and agility is a main asset. Also price is a main driver in today’s market, so cost reduction is as important as product cost when sales are threatened.

I have found that too many companies, especially larger ones, get in their own way. They have too many processes that do not add value, and are very slow; most important, too many people working on the same things, each with a little piece of the whole to complete, and most with no power to move the process forward. This is due to two main factors: 1. The organization of the process itself, and 2. Too many people involved in decision making, most not empowered to make even small decisions. This all costs time and money.

Two examples, two companies, both US companies manufacturing in China:

1.     Company A makes mens shirts. One print of bulk fabric due for quick turnaround has some shading bars. It is visible in fabric form, but when sewn into a shirt it is nearly impossible to see. Within one day of the problem being uncovered, the factory produces a sample that proves this. The players in China, including the head of all Asia offices, as well as the quality manager, agree that this sample is acceptable to go ahead. However, they refuse to make the decision and send the shirt to US for final decision. Two weeks later, the decision is made and, naturally, the delivery is delayed.

2.     Company B is making a shawl that will be packaged with some woven strips which use a Velcro closure. Someone decides to change the shape of the Velcro closure from square to round, and, when samples are examined, it is found that the adherence is not acceptable. The solution is to change back to square to give the Velcro more traction and iron the patches to make sure they adhere well. Good solution. That being said, it took about 5 days and more than 30 emails to come to and approve this conclusion.

Both cases clearly illustrate my point.  There are two problems: 1. Too many cooks in the kitchen and 2. Nobody feels empowered to make the decision except the big boss, finally-like a basketball team passing the ball 30 times and nobody wants to shoot.

What should happen here?

1.     Change the process and perhaps reduce the number of players so decisions can be made quickly. Most companies are set up in silos- every order requires the participation of many departments, all of whom have one piece of the process and very little impact on the whole. What is more, they have no personal interest in problems in the other area, even if they may have caused them. Oh, and they don’t usually talk to each other.

2.     Empower staff so that decisions can be made at the lowest feasible level. If you hire someone to “manage” something, let them manage. If you don’t trust them to manage, you shouldn’t have hired them. It is undeniably true that people who are put in the position of sheep end up being sheep, even if they weren’t when they started the job.

3.     Find staff that are highly productive and add value; you can give them more workload, thus reducing the number of fingers in the pie. Even if you have to pay them more.

4.     Think big, be small. Reduce your staff as much as possible- just a Seal Team of highly effective people. Will cut cost and reduce the number of hands in every process and decision.

Each case and each company are different, but the above principles work are universal.

Here are some more specifics of what can be done to improve and speed up the process:

1.     Reorganize along project lines rather than functional lines. IF one person manages one order or one factory by themselves, they will be fully conversant in all aspects and will not have to wait on who-knows-how-many people to answer questions or make decisions. It is their order-period- and they cannot defer the responsibility to anyone else if problems occur. They and only they must solve problems and get it done.

2.     Simplify your process so it can be handled by fewer people. For example, the omnipresent PSR (Production Status Report). In every case that I have seen, these reports are a waste of everyone’s time. All you need to know- just a list of key events with due dates, another column for actual dates (AKA reverse calendar). Not the date every style goes to cutting, sewing and packing.

3.     If a process or part of it does not add value, don’t do it. You will simply waste money and slow things down. For example, inline inspection. For continuing styles and with a good, dependable factory, problems with sewing should almost never happen. Even if 5% problems (way high), why waste time doing 100% of production? Put the burden on the factory to get it right.

I am sure that the biggest challenge here is change. Companies are rarely willing to give up something that they believe gives them a comfort level-even if they cost too much, slow things down too much, and problems happen anyway (always). Unfortunately, many don’t know any better way. What is needed for them is a new standard and belief in new possibilities that they either never considered before or considered and dismissed.

The most important lesson is that little problems should be just that-little problems. If they become a big problem, probably your process is the problem.

US Apparel Sourcing- Are We At The End of the Story?

A recent public report by Goldman Sachs considered the US-China trade relationship in apparel and explored the question of whether, with the storm clouds of change brought about by this administration, it was feasible to bring a significant amount of manufacturing back to the US.

After consideration, their analysis was that it would take an investment of about $50 billion, 5-10 years to build, hire and train, and would require a price increase of around 15% due to multiple times the labor cost (that figure is low in my opinion).

What chance is there of that happening? Without a seminal event that required the building of US factories just to maintain supply (considering also that China apparel exports are estimated $300 billion/year), who in their right mind would invest that kind of money just to end up with product that is more costly- in a market that is driven by price? And, if there is some political breakdown that results in higher tariffs or drives the US-China relationship down the drain, what will happen to the industry in the 5-10 years it takes to build this questionable solution with their biggest source of supply cut off or severely restricted?

The answer can be found in the history of apparel sourcing before and since US quotas removed from China (2005).  IN the first few months of that year, an incredible amount of goods were shipped into US from China, which resulted in calls from probably the same people who are talking about it now, to restrict imports from China. The New York Times reported in March of 2005:

Imports of major apparel products from China jumped 546 percent. Last January, for example, China shipped 941,000 cotton knit shirts, which were limited by quotas; this January, it shipped 18.2 million, a 1,836 percent increase. Imports of cotton knit trousers were up 1,332 percent from a year ago.

As a result of the surge, voluntary restraints (the Elvis Era) were agreed by the two countries through 2008. As a person who lived through that era, I can say without hesitation the restrictions did nothing except raise prices and blood pressure.

Then- labor costs should have increased with the Chinese Labor Law of 2008. The aging population started shortly thereafter to affect the apparel labour force; this turned out to be the main driver of increased labour costs. At the same time, China very rapidly built infrastructure, such as high speed rail, to the inland provinces and gave great incentives to folks there to build factories. This took a while, but now many workers have enough jobs in their home provinces to not have to migrate to the East for work. So labour costs continue to rise in the main Eastern apparel-producing provinces.

Finally, the renminbi increased in value slowly but relentlessly. From 8.15 RMB/1 USD in 2006, the rate increased to about 6.05 in the beginning of 2015. It has since recovered to 6.9. (which tells you that the government will do what it has to do to maintain exports)

So, increased labour cost, declining USD exchange rate, legistlative hurdles, and China still represents about $300 billion of the $1.5 triliion US apparel market. Why?

First, China put some of that trade revenue to good use with infrastructure improvements, such as high speed rail, that make the US counterpart look sad and aged by comparison (that is something Goldman Sachs did not mention- how much would need to be spent on infrastructure improvements in US to facilitate a $50 billion investment and an increased labour force of 500,000?)

Second, China found a way to decrease or at least hold costs by increasing the efficiency of manufacturing- most especially, and this is a key to success and a major deficiency in many other countries- creating an almost perfect vertically integrated industry on a very convenient map. In apparel, not only manufacturing but all raw materials and components can be found within the same provinces as most of the factories-Zhejiang and Jiangsu.

Third, above and beyond infrastructure, the government is devoted to policies that will stimulate growth and also offset global and internal factors such as those mentioned above.

Finally, sourcing managers found out that a main reason that China endured as the main apparel manufacturing location is that it continued to be the best choice.

Labour shortage or not, 1.4 billion people in a relatively educated country with a historic affinity for business and business acumen trumps-well- every alternative combined.  No country has the population that China does (except India, whose pitiful lack of infrastructure and backward population, and non-helpful government takes it out of contention), and no country has the vertical integration. Bangladesh, Vietnam, even Thailand etc. still depend on China for raw materials such as fabric.

So here we are in 2017 and China is still the main exporter. What do we see in the future that will change this balance significantly? My view is that whatever was going to happen as far as sourcing diversification has happened already. No emerging countries/regions are threatening to steal significantly more orders from China than they already have. In the past, there has been lots of talk-such as the talk of Africa being the future of global sourcing. Didn’t happen there or anywhere else, and won’t- at least not with the scale that would make a dent in China’s exports.

Unless there is a country or region I missed, I think the diversification of sourcing that was going to happen has pretty much played out- mainly because of the internal factors that limit sourcing as discussed above- population, raw materials, etc. In a time when apparel business is undergoing major changes, nobody on either side of the export-import equation in apparel is going to make major factory investments anywhere-especially in the US where it may be set up to fail.

Message to Washington: The practicality of punitive trade reforms against China for policymakers is: OK, do it- then what?